"Have you met the cretins we have in Westminster? Do you think we can be worse than that?" --- Nigel Farage

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Friday, 16 October 2009

Because I am worth it

There has been a lot of huffing and puffing in the left of centre media, Polly Toynbee in the Guardian and many other outlets, about the relative pay in the private and public sectors. Public sector workers says Ms Toynbee are underpaid compared to the private sector. She then explains that they are actually paid more but that is because they are more highly qualified, so they are actually paid less than they deserve on a relative basis, or some such nonsense.

Oh, and we can ignore the gold plated pension schemes according to Ms Toynbee, that is not a matter of compensation but of prudential provision by the state and mean-hearted fecklessness on the part of the private sector.

All total tosh, of course. In the private sector, we know that you are worth what people are prepared to pay you. What they are prepared to pay you is limited by two factors: the value that you create and the resources available to the company. What you feel you are "worth" is frankly irrelevant. The economic value of qualifications are often overestimated by their holders (and I have three daughters studying at or graduated from the same university as Ms Toynbee, while I studied at the other, more highly ranked in world league tables, blue university).

When it comes to the value of workers in the public sector, the same logic applies. All that a public sector worker is worth is their proportionate share of the income available to the state. Collectively the public sector workforce is worth no more than tax receipts less non salary expenditure, plus or minus a bit depending on the state of the economy.

When government collects £500 bn in taxes and spends £700 bn, it is clear that collectively the public sector is paid more than it is "worth", and that over payment might be any figure you care to think of between £50 billion and £150 billion, depending on what you want to take into account, your view on the state of the economy, structural deficits, wasteful capital spending, acceptable deficits etc.

Two few years ago as the economy was tightening I discussed the state of the financial world with an academic friend at our most highly esteemed seat of learning on the edge of Fenland, and she told me that from her point of view there was no hint of any budget cuts. Now it seems the real world is becoming clear.

There has never been any other basis for value, and much as we admire our highly trained NHS medical staff, who by the way do have the highest median remuneration of any sector, higher than financial services, and are the most highly state paid medical staff in Europe, they have to justify their pay on the basis of what others are willing to pay. The same goes for the community outreach and diversity workers, MPs and their hangers on and quangocrats.

9 comments:

Have you ever seen how local goverment pay grading works? They've done their best to remove market forces from the equation completely (which is of course not possible in a market based economy).

I've worked in both the public and private sectors. I get paid more in the public sector, for not working as hard, but having a more responsibility.

If taxpayers spend money to put me through an exam about something there is no demand from them for me to do, they will have to pay me even more, not to do what the exam was about. I'll get a 20% or more pay rise (if I still have a job after the axe comes dow, but given about 20% of the people in my department are over 55 I probably will) have a piece of paper that says I can measure things but on a day to day basis just do exactly the same as I did before.

Well I don't know what your personal circumstances are but I can see that their might be some incremental value in your piece of paper because it might let you move on to more technical/responsible work, which is why they might want to invest in you and pay you more, and there might be a good reason for giving you a larger slice of the public sector salary "cake".

But the issue that I am concerned with is not the relative size, but that the country can only afford to pay fr a certain level of public services, and cost of the public services that are purchased should bear some relation to the taxes raised.

The skill of government is to balance priorities. The easiest thing to do is to pay generous salaries to unlimited public sector workers, paid for with borrowed money and passing the cost to later generations.

Everybody likes a free lunch, but this government is taking the mickey.

They completely lost control of spending years ago. The only way Cameron will be able to extert any control will be to cut headline budgets.

I once worked in a council where the head of environmental health was an ex-greenpeace activist. I'd estimate he spent 20% of his budget performing non-statutory functions, effectively promoting his own political views.

If he was told to cut his budget by 10% would he cut half of his pet projects or reduce statutory services? I don't know.

The easy way to save money in the public sector would of course be to start sacking all the people can't do their jobs. That'll never hapen either. Cameron and Osborne will just have to lop as much as they can off the various budgets at cabinet level and hope it works out OK.

Who will make council chiefs and quangocrats go through with the external auditors recommendations?

We've had external auditors before, they told us we were 25% overmanned. The head honchos just ignored this recommendation and took on more people to implement the other recommendations in their report.

Bill: sacking half a million people will save at least £10bn/year in wages. I consider that to be quite a good thing to be doing in an economy drive!

Redundancies (and the inevitable dole costs) are sad, but it's better than paying people to do useless paperwork which will then be processed by more people in non-jobs. It's recognised that Full Employment is a pipedream, but much of the public sector is devoted to doing things that don't need doing. That is an expensive waste and needs cutting.

Let's put the £10bn another way: Do you prefer 250 basis points on VAT? One or two pence on basic rate income tax? Or, equivalently, on NI up to the UEL? Or, instead of job cuts, a 10-20% pay cut across the entire public sector so that expenditure balances receipts?

Bill, thanks for posting. I don't think it matters whether the extra expenditure goes in high salaries (they are high particularly when pensions are included), the staffing levels (they are also excessive), or the cost of non-salary expenditure (I have blogged about some of those that are known to me and on which I feel qualified to comment). so long as we have a government that thinks it is not only worthwhile, but "good" for the economy to spend as much as possible, then we are all going to be in a mess.

As I have blogged a couple of weeks ago the assumption that Keynesian stimuli will always work doesn't necessarily hold in modern international and unbalanced economies.

About Me

Alex is an experienced investment banker working in London's Docklands. He is obsessed with personal status, with his work coming second and his family a distant third. His commitment to status requires him to have all of the latest professional gadgets, including an iPad, a BlackBerry and a 4G mobile phone. Alex usually works for Rupert Sterling at Megabank, but has, in the past, worked for Mr Hardcastle as his Head of Corporate Strategy.

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